The Forgotten Fertilizer

In the world of fertilizers, phosphates are often the forgotten nutrient. Attention is most often centered on nitrogen as it is consumed in the greatest quantities domestically whereas phosphate has become the least-used fertilizer nutrient in the U.S., by mass. The global phosphate market is nonetheless huge and in turn makes the world's largest phosphate producers Mosaic (NYSE: MOS) and Potash Corp (NYSE: POT) worth considering as an investment for reasons beyond just a presence in the nitrogen or potash markets.

Middle-child syndrome Phosphate is stuck in the middle. World demand for phosphate is greater than that for potash but less than demand for nitrogen. Projected growth in demand for phosphate is greater than that for nitrogen, but less than the projected growth for potash. Phosphate is typically the second most limiting nutrient for cereal and oilseed crops, again trailing nitrogen. The list goes on...

The annual demand for phosphate as a fertilizer nutrient in 2014 is projected to be over 44 million tonnes, sold primarily as monoammonium phosphate (MAP) and diammonium phosphate (DAP). The average price per tonne of MAP (which is typically ~46% phosphate by mass) and DAP (typically ~52% phosphate by mass) realized by CF Industries (NYSE: CF) in the fourth quarter of 2013 amounted to $382 and $348, respectively. The phosphate market is clearly a massive one deserving of attention from investors. The very nature of phosphate fertilizer, however, now requires big brother nitrogen in its production due to the fact that MAP and DAP require ammonia in their synthesis.

Demand for all three major crop nutrients is expected to increase globally, with potash growth of around 3% expected in the near-term versus slower growth projected for phosphates and even slower growth anticipated for nitrogen. Phosphates are again caught in the middle in terms of global growth, though demand growth for phosphates in Central America and Europe is expected to exceed that for nitrogen and potash in those regions. Conversely, growth in phosphate demand throughout Asia may trail that of both nitrogen and potash.

Never an only childHalf a century ago phosphate rock was sold mostly unrefined as a fertilizer, and phosphate mining, followed by its mostly direct sale as a fertilizer, could be conducted as a stand-alone business. Now, the more concentrated MAP and DAP products have transformed what was once a mining business into a broader chemical processing business. Though the transformation enabled reduced shipping expenses and served other practical advantages, it also has required phosphate producers to also use ammonia in the production process.

Sourcing ammonia becomes a major consideration for every phosphate producer, and as North American phosphate mining is largely concentrated in the southeastern U.S., shipping of phosphate (and/or nitrogen) prior to processing is also required. Fertilizer companies differ in their approach to addressing this issue. Potash Corp acts as an all-inclusive fertilizer company capable of providing its own source of ammonia for MAP and DAP production. Mosaic, on the other hand, has rid itself of nitrogen holdings in an effort to go all-in on phosphates.

Strongest phosphate options Mosaic is the world leader in phosphate production, though also a major player in potash. It is now the most nitrogen-free option in the domestic fertilizer market, sourcing the required ammonia for finished phosphate products largely from CF Industries based on "strategic supply agreements" arranged when Mosaic acquired CF Industries' phosphate holdings. As the demand for nitrogen is expected to grow at a slightly slower pace than that for phosphate, Mosaic remains an interesting play in fertilizer.

Potash Corp holds a more balanced fertilizer portfolio with revenues coming from all three of the major crop nutrients. As the world's largest fertilizer company, Potash Corp's phosphate holdings are still substantial but make up a relatively smaller portion of their entire business as compared with Mosaic.

In general, being caught in the middle is not a bad place to be from an investment standpoint. The decision to be made is whether to look at phosphates as second to nitrogen in terms of total volume and second to potash in terms of projected growth, or to look at phosphates as beating potash in terms of total volume and beating nitrogen in terms of projected growth. Either way, a growing yet established global market should not be ignored when investing in fertilizer.

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